Insurance

I've talked about insurance some in the past, but I wanted to take a fresh look at it. When should you buy insurance and what is it supposed to do?

The purpose of insurance is to spread the risk or the cost. Basically, you're spreading the cost of a claim across several other people. The more you spread it, the less it costs. Say for example you buy car insurance. If you keep your car for 10 years and 100 people join with you, that's 1,000 times the annual premium that goes to insurance. Now if there are claims in those 10 years that total $10,000, you'd each need to put up $10. It's a simple example, but it works.

Same goes for home owner's insurance and life insurance. Of course insurance companies hire lawyers, secretaries, actuaries, and IT people, so they will actually charge a little more. Hopefully, they will keep the extra cost to a minimum, if not you should go shopping somewhere else.

One insurance policy that behaves differently is medical insurance. Medical insurance gives you group buying power. If your insurance is with Blue Cross, they have negotiated with your doctor to get a special rate. Get an appendectomy for only $99.95 (ok, I exaggerated there a little). However, you can negotiate with doctors on your own. I recently had to pay for some medical expenses and was able to negotiate a sizable discount by telling the medical facility that this was "self-pay". The discounts I received were about the same as if the insurance company had paid.

There are two other types of insurance I wanted to cover. First is pet insurance. I may get in trouble for this, but I don't believe you need pet insurance. You should be able to pay for regular vet bills and these shouldn't be covered by insurance anyway. Given my definition of  insurance above, you would only save money if most people didn't use the insurance. Some might argue that a pet could get some kind of cancer and need expensive treatment. My argument back is that IT'S AN ANIMAL, NOT A PERSON. Ok, I shouldn't shout. But again, the discussion above about negotiating prices applies.

The second type of insurance I wanted to cover is Umbrella insurance. By this, I don't mean insuring your umbrella, I mean a kind of insurance that covers you when everything else stops. There are limits on all kinds of insurance, the most common is liability on a car. Suppose you have an accident and it's your fault. You didn't mean to do it, that's why it's called an accident. Your liability insurance will repair the other person's car up to the limits of the policy. If your limit is $50,000 and you hit someone in a nice new Lexus, you might be in trouble. That's where the umbrella policy comes in. It picks up where your regular policy stops and goes to a higher limit. Since it won't be used often (hopefully), the cost is relatively low.

If you have assets that you can't afford to lose (house, boat, 401k, etc), I think you should have an umbrella policy. These are easily obtained by the people who currently have your auto or home policy.

Hope this helps. Any comments?